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Thursday, 20 March 2014

No Smoke Without Fire: What’s In a Name Change Mr Cohen?

Despite the firm bearing his name SAC Capital being indicted and submitting
a billion dollars plus guilty plea settlement, the man himself Steven A. Cohen has
not been charged!

The nature of re-branding SAC Capital to Point72 Asset Management is curiously odd!
Is it mere bluff and bluster about SAC’s business continuity in the face of
prosecution by US Justice Department and SEC? For those investment professionals
familiar with Mr Cohen and SAC-saga, apparently the new name of the embattled
SAC hedge fund is inspired by the current address of its headquarters: 72
Cummings Point Road in Stamford, Connecticut. The name change becomes effective
3 days before the crucial 10th
April date, when Judge Laura Taylor Swain of Federal District Court of Lower
Manhattan is scheduled to approve or
reject SAC’s November 2013 guilty plea settlement.

ØDespite the very recent convictions of two
senior SAC Capital portfolio managers (Mathew Martoma in February and Michael
Steinberg in December) and a historical litany of guilty-pleas and litigation[1] involving
former or then SAC employees, the man presiding over “the breeding ground” for
illegal trading astonishingly has yet to be charged. Especially incredulous
since Steven A. Cohen’s eponymous firm
was itself finally charged in July and pleaded guilty in November 2013. SAC’s
indictment alleged that employee insider trading activity was made possible by
“institutional practices that encouraged
the widespread solicitation and use of illegal inside information”. FPM is
circumspect about the United States’ legislature and political morality in
letting pass such abject historical professional deceit.

Our sarcasm is
best conveyed by Thomas Carlyle:“On the whole what a beautiful establishment
here fitted-up for the accommodation of the scoundrel-world”[2]

ØAs FPM updated in its actionable thesis “No Smoke Without Fire: of Reputation Risk”,
SAC’s outcome sets dangerous precedents of blatantdouble standards in the US Justice
system. This ‘double-standards’ conclusion is all too obvious when
comparing SAC’s current outcomes with the not too distant or dissimilar previous
mega-profile insider prosecution; that of billionaire Raj Rajaratnam of the
Galleon Group, which resulted in 11-years prison sentence for the Group’s
founder. Our contacts suggest that Mr Cohen has so far managed to avoid
indictment by negotiating out-of-court settlement on behalf of SAC for a reported
staggering record amount of US$1.2 bn (total SAC settlements to-date nearer
US$2 bn); whereas Mr Rajaratnam’s personal penalty was a paltry US$62.8 mn. Sounds
like Mr Rajaratnam preferred jail to parting with his ill gotten gains.
Explains his lengthy jail sentence despite formulaic rules governing sentencing.
This ‘money talks’ argument is irreconcilable to FPM’s relationships
considering that Mr Rajaratnam’s was evidently investigated, prosecuted and convicted
of 14 counts of securities fraud and conspiracy to commit securities fraud. On
the other hand Mr Cohen paid handsome settlements and submitted a guilty plea
for the firm bearing his name, despite himself not even being charged!

ØPunishment
unjustly not fitting the crime! Especiallyif Mr Cohen having overseen a breeding ground for financial
malfeasance over two decades merely receives a proverbial ‘slap on the wrist’
from the SEC administrative censure.
We will be tracking the date set for the SEC hearing. In that hearing, Mr Cohen
is expected in the least to be barred / banned from the securities industry
clear – anything short of that will be a colossal conceit in the SAC-saga. The
eponymous firm SAC, which was described by the US government as a “veritable magnet for market cheaters”,
cannot reputably exist anymore! The announced rebranding is inadvertent
realisation of that being put right. The combined authority of the US Justice and
its enforcement would be reflected upon as morally and conspiratorially wanting
for a) not bringing criminal charges and conviction after 10-years hot pursuit,
but b) also for negotiating an expedient settlement at the cost of financial
integrity and justice.

ØFPM believes the July 2013 issued SEC administrative
civil proceedings charging Mr Cohen of failing to properly supervise insider
trading at his firm and a ban from industry will be upheld. Especially after the
convictions of close aides Mr Martoma and Mr Steinberg. However as yet, the lack of criminal charges
against Mr Cohen highlights only the cosy arrangements between political
expediencies and financial clout. It would seem a great conspiracy of the
participating US authorities in the SAC-saga that they pre-conceived the two
high profile convictions mentioned. The guilty plea bargaining for reduced
sentence of junior analysts like Jon Horvath alone could not alone implicate Mr
Cohen in failure to supervise. In organisational hierarchies, more often than
not, a firm’s analysts are permitted to speak only to their line manager not directly
the group manager like Mr Cohen. So the failure to supervise censure in July
2013 preceded any real and actual failure to supervise at the time of SEC
ostensibly issuing it! i.e. no direct contacts of Mr Cohen had been convicted by
then! The mentioned two senior portfolio managers’ convictions came in December
2013 and January 2014, was clearly much expected, and as reported the Federal
Bureau of Investigations’ target was always the head honcho Mr Cohen. So while
Mr Steinberg and Mr Martoma cases were mere show-trials with foregone
conclusions, the real-deal settlement talks scheming happened before between
September and October 2013 where a global settlement was hatched. A deal which
essentially involved a non-prosecution agreement for Mr Cohen. Implying that
the two closest managers to Mr Cohen were expendable as a “grain of sand”. To
verify this run of events, after Mr Steinberg’s earlier conviction, Mr
Martoma’s defense was quoted:

In his closing remarks, Richard M. Strassberg, a lawyer
for Mr. Martoma, pointedly appealed to the jury not to convict his client as “a
means to make a case against Steve Cohen.” He reiterated that Mr. Cohen had
decided how the trading was done, not his client. (New York Times, In
the SAC Saga, It’s Hard to Chase a Shadow, February 2014)

ØIn light of the
stitch-up Mathew Martoma and Michael Steinberg were party to, for political
and financial convenience they should revolt against Mr Cohen. If they have any
sense of humanitarian self worth left, other than handsome financial payoffs
probably hidden from authorities but due for confiscation, for that they should
save-face and turn on Mr Cohen. Or they will always reputedly be “pimp daddy’s
bitches!”, as the street slang goes.

Rosemary and Mathew Martoma 2013. Keith
Bedford/Reuters

ØIn NSWF
we suggest Mr Martoma as having more providential moral righteousness and
therefore more likely to become whistle-blower against his former boss. Other
than the opined personal values, it is only circumstantially rational that Mr
Martoma being only 40 years old and in the prime of life with a beautiful young
wife Rosemary (see picture), should seek to reduce his prison
sentence from the anticipated 10 plus years. Logical considerations for giving
testimony evidence against Mr Cohen are that "it is not personal but merely
professional!"

ØAlready the simple analysis of SAC’s case
suggests racial prejudice, in how an Indian sub-continent descended hedge fund
kingpin Mr Rajaratnam was treated in Department of Justice (DoJ) prosecution and
how Semitic-descendent American Mr Cohen is in comparison being mollycoddled. The
double standards are even starker when considering outcomes of the previous high-profile
case to Galleon’s. This was the multi-year on-and-off investigation involving hedge
fund founder billionaire Arthur Samberg and his Pequot Capital Management Inc. SEC
charged Pequot and its Chairman and CEO Mr Samberg with insider trading in
Microsoft Corporation securities. Pequot and Samberg paid nearly US$28 mn to
settle the SEC's charges at end-May 2010. No prison sentence was awarded and
circumstantial evidence linking a senior Wall Street executive John Mack was
suppressed. For FPM’s reputation risk thesis ‘NSWF’, former Morgan Stanley
Chief Executive Officer Mr Mack’s associations is of continued interest. Since the
Morgans Stanley he taken on many directorships including being on the advisory
board of giants like KKR & Co
and China Investment Corporation.

ØThe legal proceedings in Galleon’s case seems to
have set unusual legal precedents which
have insulated Mr Cohen from charges. Prior to Mr Rajaratnam’s conviction
in October 2011 many insider trading cases were based on circumstantial
evidence.“…But the case against Rajaratnam was based in large part on direct
evidence – recordings of over 2,200 of Rajaratnam’s telephone conversations
with more than 130 individuals.As
Rajaratnam’s defence team found, it is often difficult or impossible to rebut
the validity of wiretap evidence.”[3]
The issue of wiretaps (taped
telephone calls)being permissible
in SACs case and the lack of such direct evidence seems to have exonerated Mr
Cohen from prosecution. Or was it likely that his heavily guarded security
ring-fenced house and office were wary of such snooping and hence outwitted
listening devices? FPM kindly asks case-linked individuals to contact us and
clarify permitted use of wiretaps in Galleon but not mentioned or used in SAC’s
prosecution.

ØCircumstantial evidence corroborated by email
was not used or accepted as evidence against Mr Cohen, despite the authourities
alleging him as co-conspirator in indictments against Mr Steinberg in the Dell
insider trading case, and in Mr Martoma’s securities frauds related to the Elan
and Wyeth. These are two particular circumstances in the both cases in which Mr Cohen, presiding
over a firm with so much history in insider trading, could have been indicted:

“Mr Horvath’s email
[containing an inside tip-off] was forwarded to Mr Cohen, who was working from
his office at his holiday home on Long Island, according to SEC filings. Within
10 minutes Mr Cohen had sold his $11m Dell position. Lawyers for Mr Cohen said
he never read the email.” (Financial Times, Decade-long
quest ends at SAC front door, 25 July 2013)

“Prosecutors introduced
evidence that a day before Mr. Cohen gave the instruction to begin dumping Elan
shares, he was on the telephone for 20 minutes on a Sunday with Mr. Martoma.
The call took place three days after Dr. Gilman first said he told Mr. Martoma
about the problems with the clinical trial.

It is not known
what the two men discussed during that Sunday call, but prosecutors inferred
that they talked about Mr. Martoma’s change of heart about Elan. As Mr.
Villhauer’s testimony made clear, Mr. Cohen’s fingerprints were all over the
trade”. (New
York Times, In
the SAC Saga, It’s Hard to Chase a Shadow, February 2014)

ØThe bare-face effrontery to the authorities,
intended or otherwise, of naming the new family office with the address of
where "insider trading that was
substantial, pervasive and on a scale without known precedent in the hedge fund
industry"[4] took
place is certainly odd if not perverse! As articulated extensively in ‘NSWF: of
Reputation Risk’ we think the strategising from SAC’s spokesman Jonathan
Gasthalter and his public relations’ firm Sard Verbinnen & Co is askew. FPM
insiders discussed whether Mr Cohen knew too much about insider-trading rings
and other high profile participants. Such speculation could have brought
unwanted disrepute upon the hedge fund industry if he was put on the stand in a
court trial. Individually he may have been "too big to fail". Instead Mr Cohen’s wherewithal about insider trading may have
served in the closed-door plea settlements. For Mr Cohen’s silence or simply
for the billion-dollar doled out SEC and DoJ would have entered a
non-prosecution agreement.We mentioned above a similar, the cover-up involving
Pequot Capital and John Mack. Below excerpt from “NSWF: Of Reputation Risk”:

“The agency paid
$755,000 in 2010 to Gary Aguirre, a former enforcement lawyer who said he was
unjustly fired for trying to investigate insider-trading allegations involving
former Morgan Stanley (MS) Chief Executive Officer John Mack. The SEC closed
its probe of Mack in 2006 without allegations of wrongdoing...” (BusinessWeek,
June 2013)

ØPositively interpreting the steadfast nature of
renaming SAC Capital with the inspiration of the current maligned headquarters’
address: FPM thinks the rebranding is
intended to serve as reminder to Judge Laura Taylor Swain of what’s at stake
from upsetting proceedingsby rejecting the guilty plea settlement. If DoJ
wanted to exact a higher price than the settlement doled out by the
multi-billionaire Mr Cohen,the
enterprise-value of the diminishing SAC empire would be on the block, including
real estate like 72 Cummings Point, causing only temporal shock in market
valuations. Additionally, if SEC’s administrative censure against Mr Cohen is
implemented it would prevent him practising in the investment industry.
Resulting in material loss of business for brokers et al whom he has rewarded
generously while in practice.

ØWhile the recent spate financial settlements
related to ‘bulge-bracket banking’ malpractices have tended to be approved it technically
need not be the case – see next bullet point. In this SAC’s case, rejecting the guilty plea settlement
with the opportunity to recoup greater financial forfeitures from indicting Mr
Cohen himself and his enterprise, would serve the public interest vastly more. Also
practically serving as a deterrent
exemplar case in insider trading enforcement to would-be cheats in the
burgeoning hedge funds or other shadow banking operations. While Mr Cohen is
worth some US$8-9 bn and public debt is ballooning to unsustainable levels;
there’s the public interest solution! Instead of the US government tinkering
with social welfare and essential ‘Obma-care’ budgets to reduce national debt,
why not morally go after the ‘big fish’ financial class that put the country in
this precarious financial mess! Anyway, it’s logical commercial sense to pursue
the big deals given a choice.

ØSAC’s obliteration or demise has not or will not
cause widespread market panic. Mr Cohen and his firm’s irregularities imn the
news so much will more likely shock or ripple in capital markets. It’s not like if similar sounding Goldman
Sachs were to be capitulated by DoJ and authorities. The distinction of the
two is that one is a bulge-bracket global institution and the other is relatively
inconsequential after the 10-years plus scandal! The widespread global banking
wrongdoings brought to Justice since the financial crisis which ballooned
national debts and caused austerity to ordinary citizens, could actually
mollify public interests if at least scape-goats were properly punished. Why
are multi-million dollar white-collar crimes and their perpetrators not
synonymous with appropriate punishment and jail sentences?

ØA crucial point of law, not too often mentioned by
the pandering financial press, is that SAC’s guilty plea settlement may not be rubber-stamped
or approved if the Judge decides that this
would not be in the public interest. FPM asks: How in all conscience is an expedient
and relatively small financial settlement (total circa US$2 bn) by a
multi-billionaire (worth US$8-9 bn), after a decade-long investigation and
prosecution in the public interest? Especially in light of SAC being indicted
for potentially committing 20-years of systematic fraud, pleading guilty after
“being on the run” from authorities so to speak, accepting punitive financial
liability, and yet ringmaster avoids criminal jail-sentence and his firm
continues to practice. To put a finer point to this, be mindful that the
‘monied-class’ in this instance is a professional from the higher echelons of
financial services. The public cannot seriously be expected to believe in the
integrity of financial capital markets, if a token billionaire banker amid the
wrought financial crisis can walk away from professional malpractices. Now
that’s scandalous!

ØWith the media-speculated prospect of SAC becoming
a smaller hedge fund operation do they need office space of some 98,900 square-foot?
Less office space would be commensurate with the anticipated diminishing assets
under management (AuM) at SAC. Seeing that its insider trading reputation has forced Mr Cohen to close its doors
to the unlimited pool of external investment capital; through essentially
investor capital-flight redemptions. And left SAC managing only internal
proprietor’s and employee’s money as a family office. After the carefully
managed winding-down of operations, as ‘orderly’ as prescribed for future
bankruptcies, and after the many years of the outrageous SAC-saga, Sard
Verbinnenhave to be credited for
managing the financial announcements and public interest news without causing
populist or corporate saver’s backlash. So this is how Sard Verbinnen’s
orchestrated news mitigates, pacifies and spins the fall from grace of SAC and
its founder:

“The move comes as SAC begins a process of
winding down and rebranding itself after pleading guilty to criminal insider
trading charges late last year. As part of the plea, Mr. Cohen agreed to close
his hedge fund to outside investors. He has set in motion plans to start a new
so-called family office that will manage employee money and his personal $9
billion.” (The New York Times: Chief
Compliance Officer at SAC Capital Is Stepping Down, February 14, 2014)

ØThe implication of the name change suggests
falsely or perhaps intended as a self-fulfilling prophecy, some degree of business continuity. Current dwindling staff of around 850,
and near 1000 at SAC’s zenith has led some resourceful speculators to suggest
Point72 and HQ-site may become an alternative investment manager sponsor. Following
in the footsteps of other hedge fund luminaries who have also voluntarily or
otherwise taken a step back from trading, such as Julian Robertson when he
invested in his ‘Tiger Cubs’ or protégée asset managers. In this respect FPM
expects that “pigs will also fly!”

FPM does not
believe the SAC-saga has ended: every good story has some sort of twist in the
tale. Ask Hollywood! Despite the legal-point about five-year statute of
limitations on insider trading charges or non-prosecution agreement, new evidence may be revealed or
uncovered to haunt Mr Cohen from the unlikeliest sources when least expected! Mr
Cohen’s reputation as King of Information Arbitrage precedes him. The
likelihood of Mr Martoma or Mr Steinberg turning into prosecution witness
against their former boss for reduced jail time is still a probability.

We know he was
lauded as a trader who could sleep at nights without worrying about book positions.
Can he sleep at night now that his reputational association in insider trading
racquets is broadly published, tarnished and forevermore lingering? While Mr
Cohen may have made his fortunes and kept most of it while playing his keep-out-of-jail
card, he will also be expected to retire with ban from industry. The aggressive
management of the multi-year insider tipping case should have resulted in a prison
sentence for the ‘big man’. Preet Bahraa, the regional US attorney for DoJ and Sanjay
Wadhwa, the Associate Director of SEC's regional office, who oversaw the agency’s investigation into SAC, may have been politically
stymied from their ultimate goal. Despite the rhetoric quoted below from April
2013 installed SEC Chairman Mary Jo White, FPM understand that investors pays their “2/20” hedge
fund fees for the added reputation-risk on the line:

“Redress for wrongdoing must never be seen as a cost of doing business
made good by cutting a corporate check” Mary Jo White at the Council of
Institutional Investors conference in 2013